Monday, January 14, 2013

A study by the Economist looks at how real estate
prices in various countries around the world have changed over the past five
years and whether purchasers are getting value for the money they spend.

Let's open with a chart showing an alphabetically ordered
summary of the data by country:

You'll notice that the first measure used is the
percentage that prices have changed since the fourth quarter of 2007, followed
by the year-over-year price change, the value against rent and the value
against income. The value against rent is a similar concept to the
price-to-earnings concept for stocks; the higher the number, the more
overvalued the property market is with respect to rent. The value against
income number measures the ratio of prices to disposable income per person.
In both cases, positive values mean that home prices are overvalued and
negative values mean that home prices are undervalued.

Here is a bar graph showing what has happened to
prices since 2007:

Notice that Ireland has seen the largest drop of
nearly 50 percent followed by Spain at nearly 25 percent and the United States
at 20.5 percent. The largest five year price gain was seen in Hong Kong
at 86.8 percent followed by Singapore at 24.1 percent and Austria at 23.3
percent. Canada is in fifth place with a price increase of 20 percent
over the five year period.

Here is a bar graph showing the valuation compared to
rent:

Canada's real estate is, by a fairly wide margin, the
most overvalued when measured against rent, coming in at a value of 78.
Hong Kong is in second place at 69 and Singapore in third place at 57.
Real estate in Japan is the most undervalued with a value of -37,
followed by Germany at -17 and Austria at -13.

Here is a bar graph showing the valuation compared to
income:

France's real estate is the most overvalued when
measured against income with a value of 35, followed by Canada at a value
of 34 and the Netherlands at a value of 33. The most undervalued real
estate when measured against income is found in Japan with a value of -36
followed by China at -35 and the United States at -20.

Back to Canada for a moment. Canada's real
estate prices are either the most overvalued or nearly the most overvalued on
two fronts, when measured against both rent and income. If we look at the
examples throughout Europe excluding the Netherlands and France, it is clear
just how quickly and deeply a price correction can get these values back to
affordable levels. In the cases of both France and the Netherlands,
recent price declines of -1.3 and -6.8 percent will likely push both rent and
income valuations back into the more affordable category like the remainder of
Europe.

On the upside, for Americans, the five year plus
readjustment in the country's housing market has pushed valuations into the
affordable category with housing undervalued by 7 percent when measured against
rent and 20 percent when measured against income. With the Federal
Reserve's loose monetary policy, mortgages rates are unlikely to rise in the
medium-term, keeping the prospect of further price declines relatively
unlikely.

Let's go back to Canada as I close this posting.
Canada's real estate prices are either the most overvalued or nearly the
most overvalued on two fronts, when measured against both rent and income.
If we look at the examples throughout Europe excluding the Netherlands
and France, it is clear just how quickly and deeply a price correction can get
these values back to affordable levels. In the cases of both France and
the Netherlands, recent price declines of -1.3 and -6.8 percent will likely
push both rent and income valuations back into the more affordable category
like the remainder of Europe.

As I've said before, Canada's real estate market is
not an island; it is no more immune from the winds of change than the markets
in the United States and the rest of the world. What goes up will eventually come down. The concern is always how painful the landing will be.

4 comments:

This article is one sided in as much as it measures against 2007. Check how prices increased in Ireland, USA, and Austalia pre 2007 versus Canada and you will see that Canada was Johnny come lately to the Real Estate boom.As for prices versus wages - we must be the most underpaid country in the World when you compare current house prices in Toronot/Vancouver to London, Sydney, Hong Kong, New York ..etc. Statisticians can manipulate data to convey any message they wish!

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.